QUESTION: Last summer I bought an investment property to let in the Portstewart area to capitalize on families staying home for their holidays. I was able to rent this property weekly through Air BnB. I know I have to return income and expenses on my tax return and wonder how I deal with this as I have never owned a second property.

ANSWER: Due to changes to interest payments for rental properties, many landlords are looking for ways to improve the tax efficiency of their investments. Those whose rental properties are in areas with high demand for vacation accommodations may find that a furnished vacation rental (FHL) is a more tax-efficient alternative to buy-to-let properties.

But how do you know if your property is an FHL? An FHL is a separate category of building which is distinct from residential and commercial properties, as HMRC considers FHLs to be a business. If a property qualifies as FHL, it attracts certain taxes and enjoys several tax benefits.

In order to qualify as FHL, the property must be:

• In the UK or the European Economic Area;

• Furnished – there must be enough furniture for normal occupancy and visitors must be allowed to use it;

• Respond to occupancy tests (see below).

The property must be let commercially (i.e. you must intend to make a profit) and, if you are renting the property out of season to cover costs but have not made a profit, the rental will always be considered commercial.

There are three occupancy criteria and all three must be met for a property to qualify as FHL. For a continuous tenancy, apply the tests to the tax year – from April 6 to April 5 of the following year. For a new lease, apply the tests over the first 12 months from the start of the lease and again over the 12 months until the end of the lease.

In order to decide if your property is an FHL, you must meet the following 3 conditions:

1 If the total of all rentals that exceed 31 consecutive days is more than 155 days during the year, this condition is not met and your property will therefore not be an FHL for that year.

2 Your property must be available for furnished vacation rental at least 210 days a year.

3 You must commercially rent the furnished vacation property to the public for at least 105 days per year.

The advantages of a Furnished Vacation Rental are as follows:

1. Furnishings in your property may be tax deductible. Capital cost allowances can be claimed on your FHL property. This means that the cost of furnishing your vacation rental to a luxury level (and in turn, increasing your potential rental income) can be deducted from your pre-tax profits. This is not an option available for long term rental properties.

2. Income generated from an FHL property is classified as ‘relevant income’ – this means you can make tax-advantaged pension contributions.

3. If you came to sell your FHL property, you may be eligible for certain capital gains tax (CGT) relief.

These are not available for long term rental properties and include:

• Easing of the sale of commercial assets

• Relief in the event of rollover

• Retainer Relief

4. With long-term rental properties, profits would be distributed according to the official distribution of ownership (for example, if you owned 50% of the property, you would share 50% of the profits). With an FHL property, you can allocate the profit over everyone’s beneficial interest in the property or by reference to the actual work done to lease the property, where there is enough evidence to prove it.

5. The biggest advantage of all is that mortgage interest is fully deductible. Unlike other residential property rentals, which currently have a restriction on how much you can claim relief for.

While there are many tax advantages to treating a property as an FHL, it’s also important to consider some of the disadvantages. These include:

Like all holiday accommodation, if the turnover of your FHL property portfolio exceeds the VAT threshold (currently £85,000), you will need to become VAT liable.

Losses of an FHL or other real estate business cannot be offset against other income, but such losses are carried forward and offset against future profits. These losses can accumulate and be carried forward over several years.

There is more day to day work as you need to monitor the days that are rented, make sure to advertise and fill it for the required days. It takes a lot of time and effort.

:: Feargal McCormack ([email protected]) is a partner at FPM Accountants Ltd (www.fpmaab.com). Advice in this column is specific to the facts surrounding the question being asked. Neither The Irish News nor the contributors accept any liability for any direct or indirect loss resulting from reliance on the answers.